Regional bank reports strong housing loan growth

A non-major bank has seen a major uplift in housing loan growth in the past financial year, rising by $653 million in FY18 despite contraction through its branch network.

The Bank of Queensland (BOQ) held its annual general meeting (AGM) last week and revealed strong growth in both its commercial and housing loans with total loan growth of $1.5 billion, up from $665 million the year before.

The bank saw above-system growth in commercial (which rose from $506 million to $623 million this year) and also strong growth in housing loans.

Loans originated through Virgin Money Australian and BOQ Specialist now account for 20 per cent of the loan portfolio, accounting for a large proportion of the growth.

Indeed, in the financial year 2017, the bank reported a $35 million contraction in its loan book through these “niche segments”, while growth in FY18 was $653 million stronger.

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BOQ Finance had a particularly strong year with growth of $250 million.

Interestingly, however, the loan book in the branch network contracted.

This can be partly attributed to the fact that the group has reduced its branch numbers by 27 per cent since FY14, while expanding its other channels.

Despite this, BOQ saw an increase in deposit balances, with deposits per branch increasing 43 per cent over that period.

Impaired assets and loan impairment expense both reduced 15 per cent from FY17 across the group, with impaired assets now 36 per cent of gross loans.

However, arrears levels remain “low and steady” and are reportedly a result of the bank’s “deliberate approach” to risk management and “clear risk appetite with responsible and robust lending practices”.

Jon Sutton, the managing director and CEO of Bank of Queensland, noted that the group’s lending growth was nearly $800 million more than in 2017, across all sectors.

“There has been a significant shift in our business mix. Our strategy to diversify our channels has delivered material benefits. Noticeable improvements in the business mix, channel and geography, positions BOQ to be more resilient over the long term,” he said.

“Loans originated through Virgin Money Australia and BOQ Specialist now account for 20 per cent of the loan portfolio. Since acquiring these businesses, both have delivered consistent organic growth, which we expect will continue into the future.”

He added that the branches continue to play an “important role” in the bank’s distribution footprint and the overall funding of the group.

Mr Sutton continued: “There is no doubt that 2018 has been a tough year for the banking sector. Public scrutiny and regulatory change, slowing credit growth and changing customer expectations have all had an impact.

“Despite this, we have delivered underlying revenue growth of 2 per cent. This result was supported by an improvement in net interest margin. Lending growth was almost fully funded by customer deposits.”

The CEO said that there was “a good underlying result in what has been a significantly difficult operating environment” and that asset quality remains a “key strength”.

Turning to the outlook, Mr Sutton said that there were both “challenges” and “opportunities” for the sector and the group moving forward, given the changing economic landscape, slower housing credit growth, elevated basis risk, lower house prices and stagnant wage growth.

He concluded: “In summary, the environment remains one of change, but we firmly believe that our strategy is the right one. What is particularly pleasing is the acceleration of growth we have seen across our niche business segments and Virgin Money Australia.

“We continue to deliver results while managing the business for the long term. Our asset quality metrics demonstrate our portfolio is resilient. We are taking advantage of our strong capital position to invest for the future.

“While the likelihood of further regulatory change is high, we remain committed to delivering positive customer outcomes. We will also continue to advocate for competitive neutrality. Our future focus will be on enhancing the digital capability across the group.

“Finally, we are confident that BOQ has a key role to play in servicing the needs of retail and commercial SME customers, now and in the future.”

Overall, BOQ’s cash earnings after tax decreased 2 per cent over the year to $372 million.

However, it noted that if you excluded the $16 million one-off profit on disposal of a vendor finance entity, cash earnings increased 3 percent.

Return on equity decreased 50 basis points to 9.9 per cent, or 10 basis points on an adjusted view.

The ordinary dividend has been maintained at 38 cents per share, bringing the full year dividend to 76 cents per share.

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